Kansas experiment

The Kansas experiment refers to Kansas Senate Bill Substitute HB 2117, a bill signed into law in May 2012 by Sam Brownback, Governor of the state of Kansas.[1] It was one of the largest income tax cuts in the state's history,[2] which Brownback believed would be a "shot of adrenaline into the heart of the Kansas economy",[3] and forecast the creation of an additional 23,000 jobs by 2020.[2]

Brownback compared his tax cut policies with those of Ronald Reagan but also described them as "a real live experiment".[4]

The law cut taxes by US$231 million in its first year, and cuts were projected to total US$934 million after six years,[11] by eliminating taxes on business income for the owners of almost 200,000 businesses and cutting individual income tax rates,[11] but by 2017, state revenues had fallen by hundreds of millions of dollars,[12] causing spending on roads, bridges, and education to be slashed.[13][14]

With economic growth remaining consistently below average,[15] the Republican Legislature of Kansas voted to roll back the cuts; although Brownback vetoed the repeal, the legislature succeeded in overriding his veto.[16]

The Kansas experiment [17] has also been called the "Great Kansas Tax Cut Experiment,"[15] the "Red-state experiment,"[18] "the tax experiment in Kansas,"[19] and "one of the cleanest experiments for how tax cuts affect economic growth in the U.S.".[20]

Also winning a sweeping victory in 2010 in Kansas was the Tea Party movement of the Republican party, whose members largely shared Brownback's views and who made up most of the Republican majority in the 2010 Kansas House of Representatives — the largest majority in half a century.[25]

When Brownback took office in January 2011, the US was still recovering from the Great Recession. In addition, there was a feeling in the state that economic growth in Kansas had been lagging behind other states in the region "for years," according to Kenneth Kriz, professor of public finance at Wichita State University.[26] Conservatives believed a large tax cut would "boost investment, raise employment, and jump-start the economy,"[20] a theory sometimes described as supply-side economics or trickle-down economics.[26]

Reducing taxes was one of Brownback's two major stated goals as governor (the other being to increase spending on education).[27]

Some Kansans interviewed by a journalist and Burdett Loomis, a political scientist at the University of Kansas, speculated that Brownback hoped that the success of the tax cuts would help launch another campaign for the presidency[17][25] — one more successful than his first attempt.

Kansas Senate Bill Substitute HB 2117, "one of the largest income tax cuts in Kansas history,"[2] was introduced in January 2011, approved by Brownback in May 2012, and became effective on July 1st of the same year.[1]

The bill also cut the state's individual income tax rates and cut the number of individual income tax brackets from three to two.[26] Specifically, the top income tax rates were cut from 6.45% and 6.25% to 4.9%, allowing higher earning taxpayers to pay the same marginal rate as the middle class;[28] the bottom rate was reduced from 3.5% to 3%. Brownback planned to bring those rates down even more in future years.

The original bill proposed by Brownback included a provision to offset the losses expected to result from the cuts by increasing the state sales tax, as well as eliminating numerous tax credits and deductions. These offsets were removed by the legislature in the final bill.[29]

As the bill was signed, predictions were made by supporters for an economic revival in Kansas, and by opponents for an unparalleled budget crisis.[8]

Brownback stated the plan would deliver a "shot of adrenaline" to the Kansas economy.[17][30] His administration projected the creation of 23,000 jobs a year in Kansas in addition to those created by natural economic growth.[2][31]

After signing the bill, Brownback argued that the cuts would pay for themselves through the increased revenue resulting from boosting the state's economic growth.[32] Supporters pointed to projections from the conservative Kansas Policy Institute predicting that the bill would lead to a US$323 million increase in tax revenue.[33]

Less supportive was a forecast from the Legislature's research staff indicating that a budget shortfall would emerge by 2014 and grow to nearly US$2.5 billion by July 2018.[11]

In June 2012, Brownback stated on MSNBC show Morning Joe, "On taxes, you need to get your overall rates down, and you need to get your social manipulation out of it, in my estimation, to create growth. We'll see how it works. We'll have a real live experiment." [34][4] He also called it a "red-state experiment".[26]

In the spring of 2014, monthly revenue for state government "crashed," and fell "massively short of projections".[19][17] The Washington Post and Michael Hiltzik, a reporter for the L.A. Times[35] warned that job creation and economic growth in Kansas were lagging those of its neighboring states.[36][Note 1]

Nonetheless, many conservative sources were enthusiastic. The Wall Street Journal published an op-ed by Brownback where he called his experiment "A Midwest Renaissance Rooted in the Reagan Formula", compared his tax cut policies with those of Ronald Reagan, and announced a "prosperous future" for Republican-dominated Kansas, Oklahoma, and Missouri.[40][8]

Brownback's tax consultant, supply-side economistArthur Laffer, predicted the cuts would support job growth,[41][9] calling Brownback's policies "amazing ... Truly revolutionary.”[25] Influential anti-tax activist Grover Norquist defended Brownback's tax cuts as "the right thing for the economy", and claimed that Kansas was in better economic shape than the tax-cut critics alleged, and that the state had "provided a model, a successful model, that will phase out the income tax."[10]

By early 2017, Kansas had "nine rounds of budget cuts over four years, three credit downgrades, missed state payments", and what the Atlantic called "an ongoing atmosphere of fiscal crisis".[14] To make up the budget shortfall, lawmakers tapped into state reserves set aside for future spending, postponed construction projects and pension contributions, and cut Medicaid benefits.[17] Since approximately half of the state's budget went to school funding, education was particularly hard hit.[17]

In addition to budget problems, Kansas was lagging behind neighboring states with similar economies in "nearly every major category: job creation, unemployment, gross domestic product, taxes collected".[42]

Budget and Revenue

By 2017, National Public Radio reported state lawmakers were seeking to close a $900 million budget gap,[17][Note 2] following nine previous budget cuts.[44] Earlier efforts to close budget gaps had left Kansas "well below national averages" in a wide range of public services from K-12 education to housing to police and fire protection.[15][12]

In education, school districts dealt with cuts by shutting down the school year early,[45] eliminating school programs, cutting maintenance, phasing out teaching positions,[44] enlarging class sizes, increasing fees for kindergarten, and cutting janitorial personnel and librarians.[46] School districts were consolidated and some schools were closed.[17]

By early 2017, The Wichita Eagle reported that the governor proposed taking nearly $600 million from the highway fund over the next two and a half years to balance the state general budget, after having used US$1.3 billion from the fund since 2011 for the same purpose.[47] This first transfer of funds had already caused the Kansas Department of Transportation to "indefinitely delay" two dozen road expansion projects in April 2016. According to Kansas State Sen. Carolyn McGinn, “.... we’ve had pretty good roads, but now we’re starting to see the deterioration.”[47]

Millions were also borrowed from the state pension fund.[48] Kansas became the only state without a state-funded arts commission, and closed nine social service offices around the state.[25]

The tax cuts contributed to credit rating downgrades, which raised borrowing costs and led to more budget cuts in education and infrastructure.[17]Moody's downgraded the state's bond rating in 2014.[49] S&P downgraded its credit rating first from AA+ to AA in August 2014, due to a budget that analysts described as structurally unbalanced,[50] and again in February 2017 from AA to AA−.[51]

Jobs and Growth

By 2018 overall growth and job creation in Kansas had underperformed the national economy, neighboring states,[15] and "even Kansas’ own growth in previous years."[20][Note 3]

Kansas's job growth lagged behind neighboring Missouri, Colorado,[33] and Nebraska. In January 2014, following the passing of both tax cuts, to April 2017 the Nebraska labor force grew by a net 35,000 non-farm jobs, compared to only 28,000 for Kansas, which has a larger labor force.[15][Note 4]

Brownback managed to defeat Davis by 3.69 percent,[57][58][59] a decline from the more than 30% margin he had gained in his first Governor's race victory, thanks at least in part to effective campaign ads attacking Davis for his brief detention during a 1998 police raid of a strip club.[60][61]

Brownback's popularity continued to suffer in Kansas after his re-election as governor. Three separate polls between November 2015 and September 2016 ranked Brownback as the nation's least-popular governor,[62][63][64] the September 2016 poll showing an approval rating of 23%.[65][66]

Two years later "a wave of moderate Republicans" opposed to the tax cuts replaced many of the conservatives supporters of the experiment in the state legislature.[44][28] The election was considered largely a referendum on Brownback's policies and administration.[67][14][68]

By 2017 after a protracted battle,[14] the new Kansas Legislature voted to repeal Brownback's tax cuts and enact tax increases, overriding Brownback's veto of them.[69][70][71][72]

By April 2017, 66% of Kansans told pollsters they disapproved of Brownback's job performance, with 27% still approving.[73]

After "years of dealing with budget" shortfalls by borrowing, "quick fixes" and consumption tax hikes on tobacco, fuel, and other consumer goods,[14] the Kansas legislature was left with "few remaining options" other than steep and broad tax hikes or more spending cuts.[14] Brownback's 2012 tax cuts were described as threatening "the viability of schools and infrastructure" in Kansas.[16] The Kansas Supreme Court had ordered the state legislature "to increase funding for public schools by US$293 million over the next two years".[15]

A repeal of the tax cut was attempted in February 2017 by a coalition of Democrats and newly-elected centrist Republicans, who passed legislation (Senate bill number 30 or SB 30) to raise income-tax rates and eliminate an exemption for small businesses.[14][19]

SB 30 repealed most of the tax cuts implemented by HB 2117. It called for:

The Senate passed bill SB 30 (38 - 0 with 2 not voting) on February 2, 2017.[75] Three weeks later the House passed SB 30, as amended (123 - 2).[76] Shortly after Brownback vetoed this first attempt, the legislature attempted to override his veto but came up three votes short in the Kansas Senate.[14]

Several months later on June 5, 2017, the Conference Committee Report was adopted by both the Kansas House (69 - 52) and Senate (26 - 14). On June 6, 2017, the bill was sent to Brownback, who once again, vetoed the bill. The same day two-thirds majorities in both the House and Senate overrode his veto and SB 30 became law.[77]

The measure would boost state taxes by $1.2 billion over two years, in part by raising the top income tax rate from 4.6% to 5.7%, and by restoring the pass-through business tax.[15]

In the 2018 election for his successor, the Republican candidate, conservative Kris Kobach, promised to "try to roll back the tax hikes" of the 2017 legislative session, and urged a return to "a more low-tax structure like we had from 2013 to 2016" during the Brownback administration. He told voters, "Kansas doesn't have a revenue problem. Kansas has a spending problem."[44][Note 5] Kobach was defeated by Democrat Laura Kelly, who became governor.

Despite its record, and the fact that "many experts regard the Kansas tax cuts as a failure", the 2017 Republican tax cuts ("Tax Cuts and Jobs Act of 2017") has some of the same elements of Brownback's policy, and "many Republicans still embrace the ideology" behind the Kansas tax cuts, according to National Public Radio.[17]

Several sources have compared the Kansas experiment to the 2017 Federal tax cuts, which was debated during and after the Kansas cuts were repealed. The Kansas tax cuts have been described as a "warning sign",[80] "the kind of fiscal policy the Trump administration wants to enact nationally,"[16] a policy that the Trump tax cuts "echo",[15] a "template" for tax cuts that "crashed and burned",[15] and as a policy whose repeal "lays bare the ... risks for Republicans in Washington pursuing a similar policy at the national level"[28]

Kansas Republicans have also commented on the relationship between the two cuts. State Representative Stephanie Clayton, asserted, “the real example" the Kansas experiment provides to the rest of the country is "that the voters will get angry with you, and it doesn’t matter how solid-red your state is.”[14] State Senator Jim Denning warned “It was supposed to increase the GDP, and it didn’t. The feds will have that same problem,”[81] a sentiment repeated by William G. Gale of the Brookings Institution, who stated that one of the most important implications of the Kansas experiment for federal tax reform is "not to expect tax cuts to boost the economy much, if at all."[20]

The act received criticism for shifting the tax burden from wealthy Kansans to low- and moderate-income workers.[82][41]

According to the Center on Budget and Policy Priorities, the bill cut the taxes of "the wealthiest 1% of Kansans by 2.2%," while it projected that the poorest 20% of Kansans would see "their taxes increase by 1.3%".[83]

Bryan Lowry of the Wichita Eagle estimated that almost 70% of Kansas lawmakers, as well as Governor Brownback and his wife, benefited personally from the tax cuts through business or property that they owned, which being non-wage income, was exempt from taxes under the 2012 law.[84]

According to critical observers, part of the reason for the large revenue loss was that the new 0% tax rate on pass-through business income was "exploited"[17] and had "become a loophole"[28] for taxpayers. Instead of 200,000 small businesses taking advantage of it, about 330,000 entities used the rule;[28] among them were large limited liability law firms and oil exploration companies.[17] These companies included a large number of subsidiaries of the Wichita-based Koch Industries,[32] a very large firm whose owners, the Koch brothers, strongly supported the tax cuts and contributed to the political campaigns of Brownback and other tax cut supporters.[32][85][86] Another source of exploitation is thought to be "tens of thousands" of workers who previously paid individual income tax but re-titled themselves as "independent contractors", claiming their remuneration was actually business income and now tax-free.[28][17]

According to Max Ehrenfreund and economists he consulted, an explanation for the reduction instead of increase in economic growth from the tax cuts is that "any" benefits from tax cuts come over the long, not short run, but what does come in the short run is a major decline in demand for goods and services. In the Kansas economy, cuts in state government expenditures cut incomes of state government "employees, suppliers, and contractors" who spent much or most of their incomes locally.[87] In addition, concern over the state's large budget deficits "might have deterred businesses from making major new investments".[87]

A working paper by two economists at Oklahoma State University attempted to measure the effect of the tax cuts on Kansas's economy using historical data from several other states with economies structured similarly to Kansas. They estimate that the Kansas economy grew about 7.8% less, and employment about 2.6% less, than it would have had Brownback not cut taxes.[87][88]

The experiment has been described as a "failure" or "failed" by many sources,[89][90][20][91] but not all. Gov. Brownback himself strongly rejected criticism of his cuts or any need to adjust the law,[92] declaring the cuts a success, and blaming perceptions to the contrary on a “rural recession” and on “the left media" which "lies about the tax cuts all the time”.[14]

Other explanations for the repeal have been provided by conservative media and organizations. The Wall Street Journal called it in part the work of labor "unions getting even with the Governor over his education reforms, which included making it easier to fire bad teachers".[93] It also defended the cuts pointing to low unemployment, which was 3.7% as of June 2017, and "considerable small-business formation" in Kansas.[93]

Reason magazine blamed problems with the experiment on the failure to eliminate "politically popular" tax exemptions and deductions, and to cut spending up front.[93]

Cato Institute warned the experiment revealed that "many Republicans" are actually "pro-tax big spenders", but claimed a "long-run" victory for the experiment since the post-repeal tax rates will still be "significantly lower" than before the Brownback experiment. It did, however, agree that Republicans shouldn't claim that "tax cuts pay for themselves".[93]

In 2015, "10,900 total nonfarm jobs" were added to the Kansas economy, for a job growth rate of 0.8 percent, among the lowest rate in the country that year.[37][38]

From January 2013, to 2015 private sector jobs in Kansas grew by 3.5%, less than half of the national rate of 7.6%.[39]

^Other reports were that Kansas had a $350 million budget shortfall in February 2017.[43] or had the state’s "budget deficit was expected to hit $280 million" in 2017".[15] For the previous fiscal year (2016), the state's tax revenue was $420 million below the amount raised the year the tax cuts first took effect.[32]

^From March 2015 to March 2016, Kansas gained 800 private-sector jobs, an increase of 0.1 percent.[52]

^Instead of the 100,000 new jobs Brownback had promised would be created in the four years of his second term, as of January 2016 (slightly more than a year into this term), 700 were added during this term.[33]